Accounting for consignments rests on one timing rule: the consignor keeps the goods on its balance sheet and books no revenue when they ship to the consignee, and the consignee records nothing as inventory because it never owns the goods. Revenue appears on the consignor’s books only when the consignee reports a sale to an end customer, and the consignee’s own revenue is limited to its commission. Everything else, from which costs get capitalized to how returns are handled, follows from that rule.
When an Arrangement Counts as a Consignment
Delivering a product to a dealer or distributor does not automatically count as a sale under ASC 606. If the recipient has not obtained control of the product, the arrangement is a consignment and revenue recognition waits until the goods actually sell to an end customer.1FASB. Revenue from Contracts with Customers (Topic 606) – Section 606-10-55-79
ASC 606-10-55-80 lists three indicators that an arrangement is a consignment:
- The product remains controlled by the consignor until a specified event occurs, such as a sale to the dealer’s customer or the expiration of a holding period.
- The consignor can require the product’s return or transfer it to a different dealer.
- The consignee is not unconditionally obligated to pay for the product, though a deposit may be required.
The indicators are not exhaustive, but when two or three are present, the arrangement almost certainly qualifies as a consignment, and the consignor cannot book revenue on the shipment date.2FASB. Revenue from Contracts with Customers (Topic 606) – Section 606-10-55-80
Do not confuse a consignment with a sale-or-return. In a sale-or-return, the buyer actually purchases the goods but has the right to return unsold items, so title and risk pass at delivery and the buyer records inventory. Under UCC Section 2-326, goods held on sale-or-return are subject to the buyer’s creditors while in the buyer’s possession, which is the opposite of a true consignment.3Legal Information Institute. UCC 2-326 – Sale on Approval and Sale or Return For accounting, the distinction decides whether revenue is recognized at delivery (with an estimated return allowance) or deferred until the end customer buys.
What the Consignor Records
The consignor carries the heavier burden because it owns the inventory the entire time. The goods are physically sitting in someone else’s location, but they belong on the consignor’s balance sheet.
When goods ship, the consignor reclassifies them out of regular inventory (such as “Finished Goods Inventory”) and into a separate account, typically called “Inventory on Consignment.” The separation keeps the balance sheet accurate and gives management visibility into how much inventory sits at consignee locations.
Costs the consignor incurs to get goods to the consignee’s location are capitalized into the inventory cost. These typically include outbound freight, special packaging, and insurance during transit. Costs that relate to the selling effort rather than placement, like national advertising or general administrative overhead, are expensed as incurred. Capitalizing selling costs would overstate inventory and delay expense recognition.
Revenue is recognized only when the consignee reports that goods have sold to an end customer. At that point, the consignor records the full sales price as gross revenue because it is the principal in the transaction: it controls the goods before transfer, bears inventory risk, and typically sets or approves the selling price. Under ASC 606’s principal-versus-agent guidance, a principal recognizes revenue at the gross amount of consideration it is entitled to receive. The commission owed to the consignee and any reimbursable expenses are separate expense lines, not reductions of revenue.
Reimbursables the consignee pays on the consignor’s behalf split two ways. If the cost is inventoriable (freight to get goods to the consignee’s location, for example), the consignor capitalizes it into Inventory on Consignment. Local advertising, minor storage fees, and similar selling costs are recorded as expense when the account sales statement arrives, usually in an account like “Consignment Selling Expense.”
What the Consignee Records
The consignee’s accounting is simpler because it is an agent, not an owner. The central rule: the consignee never records consigned goods as an asset.
Even though the goods do not appear in the formal accounts, the consignee still needs to track what it has received, sold, and has on hand. Most consignees maintain a memorandum or off-balance-sheet record for this purpose. It documents quantities and does not create assets or liabilities. The only formal liability on the consignee’s books is the amount owed to the consignor after a sale, net of commission.
The consignee recognizes revenue only on its commission, not on the full sales price collected from the end customer. Sell a $1,000 item under a 20% commission, and the consignee books $200 of commission revenue and an $800 liability to the consignor. That net reporting reflects the agent role.
Expenses the consignee pays on the consignor’s behalf, such as local advertising or delivery, are not the consignee’s operating expenses. They are recorded as a receivable from the consignor (or offset against the amount owed) because the consignor has agreed to reimburse them. The settlement itself runs through an “Account Sales” statement that summarizes gross sales, commission, authorized expenses, and the net due to the consignor; both parties use it to align their books.
A Full Cycle in Journal Entries
A short example makes the mechanics concrete. The consignor ships 10 units costing $200 each. The commission rate is 20%. Six units ultimately sell to end customers at $500 each.
Shipment
The consignor moves the $2,000 cost into the consignment account:
Consignor entry:
Debit: Inventory on Consignment — $2,000
Credit: Finished Goods Inventory — $2,000
The consignee makes no journal entry and simply notes 10 units received in its memorandum record.
Inventoriable Costs Paid by the Consignor
The consignor pays $100 for freight and insurance:
Consignor entry:
Debit: Inventory on Consignment — $100
Credit: Cash — $100
Total inventoriable cost is now $2,100 for 10 units, or $210 per unit.
Reimbursable Expenses Paid by the Consignee
The consignee spends $50 on local advertising:
Consignee entry:
Debit: Receivable from Consignor — $50
Credit: Cash — $50
This is not an expense for the consignee. It is a receivable to be recovered at settlement.
Sale to the Final Customer
The consignee sells 6 units at $500 each for $3,000 in gross sales. The 20% commission is $600.
Consignee entry:
Debit: Cash — $3,000
Credit: Payable to Consignor — $2,400
Credit: Commission Revenue — $600
On receiving the account sales statement, the consignor records revenue and the related cost of goods sold. COGS for 6 units at $210 each is $1,260:
Consignor entry (revenue):
Debit: Receivable from Consignee — $3,000
Credit: Sales Revenue — $3,000
Consignor entry (cost of goods sold):
Debit: Cost of Goods Sold — $1,260
Credit: Inventory on Consignment — $1,260
Consignor entry (commission expense):
Debit: Commission Expense — $600
Credit: Receivable from Consignee — $600
Remittance
The consignee remits $3,000 gross minus $600 commission minus $50 reimbursable expenses, or $2,350.
Consignee entry:
Debit: Payable to Consignor — $2,400
Credit: Receivable from Consignor — $50
Credit: Cash — $2,350
Consignor entry:
Debit: Cash — $2,350
Debit: Consignment Selling Expense — $50
Credit: Receivable from Consignee — $2,400
After settlement, the consignor’s Inventory on Consignment account holds $840, representing the 4 unsold units at $210 each. That balance stays on the consignor’s balance sheet as an asset.
Returns and Unsold Inventory
When the consignee returns unsold goods, the consignor reclassifies them back into regular inventory:
Consignor entry:
Debit: Finished Goods Inventory — $840
Credit: Inventory on Consignment — $840
No revenue or expense entries are needed because the consignor owned the goods the entire time. The consignee removes the items from its memorandum and books nothing.
One point worth flagging: the consignor bears the risk of obsolescence and market decline on consigned inventory. If the 4 returned units have lost value because styles changed or demand dropped, the consignor takes the write-down. The consignee has no exposure because it never owned the goods. That matters for seasonal or trend-sensitive products, because the markdown risk cannot be shifted to the consignee.
Two Legal Issues That Change the Economics
Correct bookkeeping is only half the picture. Two outside rules affect whether the arrangement works the way the accounting assumes.
UCC-1 Filing to Protect Ownership
Under UCC Article 9, a “consignment” has a specific legal definition. It applies when goods worth at least $1,000 per delivery are delivered to a merchant who sells goods of that kind under its own name, is not an auctioneer, and is not generally known by its creditors to be primarily in the business of selling others’ goods.4Legal Information Institute. UCC 9-102 – Definitions and Index of Definitions
When a transaction fits that definition, Article 9 treats it like a secured transaction, and the consignor’s interest is a purchase-money security interest in inventory. Unless the consignor perfects that interest by filing a UCC-1 financing statement with the appropriate state office, the ownership claim has no priority over the consignee’s other creditors. UCC Section 2-326 spells out the consequence: goods delivered to a merchant for sale are treated as the consignee’s for purposes of creditor claims if no Article 9 filing exists, meaning they can be seized by the consignee’s creditors or pulled into a bankruptcy estate.3Legal Information Institute. UCC 2-326 – Sale on Approval and Sale or Return The consignor becomes a general unsecured creditor and often recovers little or nothing. Filing a UCC-1 is inexpensive, and for any significant inventory value it is not optional.
Sales Tax Nexus From Stored Inventory
Storing inventory at a consignee’s location in another state can create sales tax nexus for the consignor. In most states, having property stored for sale within the state qualifies as physical presence, which triggers an obligation to collect and remit sales tax on sales made to customers in that state. This physical nexus rule predates the 2018 Wayfair decision and applies regardless of whether the consignor has employees or any other connection to the state. A consignor placing goods with consignees in several states should evaluate nexus in each one, because the compliance cost of registering, collecting, and remitting across multiple jurisdictions can be significant and should factor into whether the consignment model pays off.